Dublin Rebound on Home Supply Slump May Be False Dawn

By Finbarr Flynn and Dara Doyle -
Sep 4, 2013

Residents of the south Dublin suburb of Rathgar received the kind of letter recently that hasn’t been seen since the property bubble burst six years ago.

The note, sent by Irish real estate broker DNG Group, told them that at 4:20 p.m. on July 19 the company sold a house on their street. What’s more, there were five bidders who missed out and were still looking to buy a family home in the area, according to the letter.

“The reason we are being very specific is so that people believe what we are saying,” Chief Executive Officer Keith Lowe said in an interview. “We are trying to get over: ‘Look, we’re telling the truth here, we do have buyers.’”

Brokers like DNG are seeking to overcome skepticism that rising demand for Dublin real estate is sustainable after prices jumped the most in six years in July as the supply of homes for sale plunged. The scale of the recovery is under scrutiny in a country whose fortunes were built and then lost on property. Almost three years after Ireland was forced to seek an international rescue, a quarter of all mortgages remain in trouble after the worst collapse of any real estate market in western Europe crippled lenders.

“The way I’d describe it is that prices are going up but probably for the wrong reasons,” said Dermot O’Leary, an economist at Goodbody Stockbrokers in Dublin. “It’s not because there has been a massive increase in demand; it’s because of supply being whittled down.”

Bouncing Back

Residential property prices in Dublin rose 8 percent in July from a year earlier, the Central Statistics Office reported last month. Asking prices in the southern part of county Dublin have risen to an average of 360,000 euros ($474,000) from 320,000 euros in mid-2012, real estate website Daft.ie estimates.

Victorian red-brick houses and family homes close to the city center, together with townhouses located along Dublin Bay, are among the properties leading the market higher.

In Monkstown, a six-bedroom house overlooking Dublin Bay with four floors including a basement, sold for 1.1 million euros last month. Savills Plc (SVS) is now offering a similar property for about 1.4 million euros.

A nearby four-bedroom detached house sold for 660,000 euros last month after a similar home on the same road fetched 515,000 euros in 2012, according to realtor Sherry FitzGerald Group.

At the same time, the amount of homes on the market is drying up. Between 2008 and 2011, as the crash took hold, buyers had an average of 6,000 Dublin properties to choose from at any one time, according to data compiled by Daft.ie. That’s since dropped to 3,170 and price gains in parts of south Dublin are beating those seen during the boom.

Prices Quadrupled

Irish home prices quadrupled in the decade through 2006. By then, construction amounted to about a quarter of the economy, leaving it vulnerable as international money markets seized up after Lehman Brothers Holdings Inc. collapsed in September 2008. Ireland’s economy shrank about 8 percent in 2009 as building activity froze almost overnight.

In Dublin, house prices are down 52 percent from their height in 2007, while apartment prices have plunged 59 percent, the statistics office said on Aug. 20. Outside Dublin, residential property prices are down 49 percent.

At the end of June, 18.6 billion euros of private residential mortgages were in arrears of more than 90 days, with another 8.7 billion euros of buy-to-let loans also behind in payments. Moreover, banks are losing $1 billion a year on market-tracker mortgages -- loans handed out during the housing boom that are tied to the European Central Bank benchmark rate, Merrion Capital estimates.

Given the extent of unresolved loan issues, some people doubt the pick-up in Dublin can continue.

Leeson’s Warning

Outside the capital, problems remain as the economy struggles to emerge from recession. Nationwide, the average home price stood at 171,500 euros in the second quarter, 4 percent down from a year earlier. That prolonged a slide that started in March 2008, according to Daft.ie.

“You see this in stock markets: a coffee shop rumor starts, and everybody starts to buy a particular stock, and then there is no basis to it,” said Nick Leeson, the former trader whose wrong-way bets on Japanese stocks ruined Barings Plc in 1995 and is now advising Irish borrowers looking to renegotiate debts. “You’d like to think that people have learned something from the last time this happened,” he said in an interview.

DNG’s Lowe expects Dublin prices to rise by about 10 percent annually in coming years as renters move to buy properties amid a “fierce lack of stock.” The property crash and lack of financing increased the number of households in rented accommodation by 47 percent in five years, the statistics office said in a report last year.

Depleted Stock

“Some of the 400,000 people in rented accommodation are beginning to buy,” Lowe said by telephone. “There is very little stock to meet demand.”

In part, supply of homes is held back because so many borrowers are still in negative equity. About 60 percent of homebuyers that took out loans between 2005 and 2010 face a situation where the outstanding debt is worth more than the property. That makes it harder to move houses as sellers have to meet shortfalls on mortgages.

The structure of the home-loan market has also amplified the lack of supply. Tracker mortgages, which were introduced in Ireland in 1999, today account for more than half of the nation’s 140 billion-euro home-loan market, according to the central bank.

By moving, holders of trackers lose those loans, leaving them at the mercy of banks, which have raised mortgage rates to compensate for losses on trackers.

Foreclosed Properties

Then there’s the potential wave of foreclosed properties that may be ahead to snuff out any nascent recovery, said Leeson, who married an Irish woman and settled in Galway in the west of the country after his 1999 release from jail in Singapore.

Up to now, banks have repossessed few homes, in part because of a legal loophole that hampered the process. That’s since been fixed and banks are now preparing to move.

In the second quarter, Allied Irish Banks Plc (ALBK) sent 5,900 letters to defaulters who have ignored the bank’s efforts to reach them, Chief Executive Officer David Duffy told lawmakers yesterday. In the letters, the country’s biggest mortgage lender threatened to take legal action that could ultimately lead to repossession.

“There are probably 100,000 properties to hit the market yet,” said Leeson. “If there is a correction coming off the back of this slight spike in values, then the correction will be twice as hard as the rally.”